Borrowers to gain as RBI to tell banks to link loans with repo rate.

MUMBAI: Unhappy with the pace of transmission of interest rate cuts, the Reserve Bank of India plans to direct banks to start providing loans linked to an external benchmark like the repo (rate at which the RBI lends money to banks). 

Addressing bankers on Monday, RBI governor Shaktikanta Das said that some banks have already announced their intent to link lending rates to an external benchmark.

“The expectation is that banks will move faster on this. The time has come to formalise the linking of rates to an external benchmark. The RBI will work with banks on this and take the necessary steps in coming weeks,” said Das. 

He was speaking at an annual banking sector conclave organised jointly by Ficci and IBA. After the central bank’s August monetary policy, a few banks had announced their intent to link deposits and loans to an external benchmark. The SBI was the first to announce a repolinked home loan, overdraft and savings account

Liquidity no longer a constraint, says RBI guv

Following the rate cut of 35 basis points (100bps=1 percentage point) by the RBI this month, SBI’s repo-linked home loan will become the cheapest at 8.05%, effective September 1.

In his speech, Das said recent events have generated an attitude towards the financial sector that ranges from an “existential angst” to a more positive outlook that hinges on the opportunities beckoning us. “I am not saying that we should have a Panglossian attitude and smile away every difficulty, but we should also look at the opportunities,” said Das.

Pointing out that liquidity was no longer a constraint, Das said that the RBI has been soaking up Rs 1.5 lakh crore to Rs 2 lakh crore of surplus liquidity from banks on a daily basis.

The governor hinted at a continuation of the accommodative monetary policy, stating that the central bank gave the highest priority to growth. He said that the RBI was monitoring the top 50 non-banking finance companies (NBFCs) and engaging with them to ensure that there is no repeat of a systemically important NBFC failing.

According to Das, the government is expected to release upfront the Rs 70,000 crore of capital towards recapitalisation of public sector banks. “While this would strengthen the PSU banks, the real test of performance, efficiency, stability and improved governance would be the ability of the banks to raise capital on their own,” he said.